The trajectory of the collection will determine whether the framework is too rigid or too loose – 05/25/2023

The NAF (New Fiscal Framework), approved by a large majority, in the Chamber of Deputies, this Wednesday (24), deserved antipodean evaluations from economists more to the right and more to the left of the political spectrum. The conclusion that can be drawn, knowing the antagonistic views on the same set of measures, is that, in addition to the horrible name it has gained, the new rule of control of public accounts is good, within the circumstances and possible.

Economists further to the right classified as “lax” the new rule for controlling public accounts, whose basic text was approved, by a large majority, in the Chamber of Deputies, this Tuesday (23). According to them, the fiscal framework of the Lula government will not achieve the necessary surpluses to contain the advance of the public debt and stabilize the economy.

Economists on the left believe that the approved norm is too rigid. For them, the limits and restrictions imposed in the new framework bring it closer to the spending ceiling of the Temer and Bolsonaro governments, condemning the social area to living with insufficient resources, and making Lula run the risk of defrauding the promise to “include the poor in the Budget “.

NAF versus spending cap

The truth is that it will not be possible to know in fact if the framework will result in one thing or the other until the tax reform is approved and, even before the reform takes effect, if the government will be able to increase the volume of public revenues, with the promised cut the many existing tax privileges. This is because the space for spending in the new rule is dependent on public revenue. The NAF, in summary, links, with limits and within a range, the space for increasing public spending to the expansion of revenue.

Analysts more to the left are comparing the new rule to the spending ceiling invented by economists in the Temer government and demolished, in order to maintain it, by the then Minister of Economy Paulo Guedes, in the Bolsonaro government. But while the new framework imposes a spending cap, the constraints that determine the cap are completely different. See the differences here:

Under the new rule, growth in public revenue will determine the space for spending, as long as a range is obeyed — 0.6% above inflation variation, if revenue is low, and 2.5% above inflation, if revenue is low. is high.

In addition, part of the possible fiscal surpluses may be used to expand public investments, albeit also with the limitation of a ceiling. The control of the public debt will be given by the result of the public accounts, since annual fiscal surplus targets are foreseen, within bands.

Under the spending ceiling rule, public expenditures were corrected only for the previous year’s inflation — regardless of the volume of revenues. According to the rule, public spending could not have a real increase for 20 years. Revenue increases, due to economic growth, the creation of taxes and changes in rates or greater efficiency in tax collection, should be applied to reducing the public debt.

Long story short, the spending cap was yet another manifestation of the neoliberal surge that took hold of the Temer government, whose main objective was to reduce the size of the State. In practice, the idea was to reduce social programs and make room for the private sector to eventually assume at least part of the government’s obligations — in plain English, to remove the poor from the Budget.

This is not the case with the new framework. Changes introduced by the project’s rapporteur in the Chamber, deputy Claudio Cajado (PP-BA), made the fiscal control norm more rigid – Fundeb, for example, which was outside the rule in the government’s original version, was included in the limits, as well as such as the possibility of reducing investments to accommodate expenses. But the changes did not reach the point of making the government’s more active social action unfeasible. Everything will depend on the next steps of fiscal policy.

There are escapes for spending contingencies, in case of non-compliance with goals. Despite providing for triggers and punishments when goals are not met, the ruler will not be criminalized with the risk of losing his mandate.

Hunt for new recipes

The problem with tying the space for public spending to revenue is that, unlike what happens with expenditure, the government does not control public revenue. Public revenue increases are basically dependent on economic growth, a factor that the government can influence, but not determine.

Hence the importance of tax reform. If the simplification and reorganization of taxes is successful, prospects for productivity gains and greater economic growth open up. There is also the part of the Income Tax reform, whose goal is to make those who dodge the tax or contribute less than they should and could contribute. At the end of this complex roadmap, public revenues would tend to grow more.

Before the reform produces the expected positive effects on production, the hunt for tax privileges will play a major role in the war to balance public accounts without social exclusion. In the accounts of the government itself, the sum of exemptions, exemptions and evasions reaches R$ 600 billion per year. Transforming, each year, a quarter of that amount that escapes public accounts — equivalent to R$ 150 billion — into active revenue is the crusade that the Minister of Finance, Fernando Haddad, has promised to undertake.

There is a long way to go to find out if the new fiscal framework will work or not.

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